Golden times for insurance as profits continue to rise

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The Australian insurance sector is in an exceedingly strong position, after industry-wide profitability almost doubled in 2012.

The latest Pendulum report, a wide-ranging review by Deutsche Bank and Finity Consulting, found insurance trading result margins lifted to 18.6% last year, the 13th consecutive positive result.

“For the first time in two years, Australian insurers are not facing fresh profit headwinds,” the authors state.

“Bond yields appear to have stabilised at lower levels and reinsurance costs look to be heading back down. Indeed, re-pricing initiatives in property classes have more than offset these headwinds and surpassed our expectations.

“As re-pricing benefits earn through over 2013/2014 and cost cutting programs of the three large listed players start to deliver, underlying industry profitability looks set to expand further in the near-term.”

The report also predicts that the more neutral weather conditions expected this summer, along with low inflation, will further boost profit margins.

However, the authors expect return on equity to soften soon.

“Despite good reasons to remain upbeat near-term, we doubt the party will last past 2014,” they state, identifying increased competition from challengers such as supermarket retailers as a particular threat to the Motor sector.